The Cooper Companies, Inc. — Q3 2018 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2018. Unaudited consolidated results; comparisons are with the corresponding 2017 periods. Amounts are in millions of dollars except per-share data and ratios.
Business context and performance
Cooper operates CooperVision, a contact lens business, and CooperSurgical, focused on women’s health, fertility, diagnostics and contraception. Growth reflected contact lens volume and product mix, foreign exchange, and acquisitions—particularly the PARAGARD IUD assets acquired in November 2017 for approximately $1.1 billion.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $660.0 | $556.0 | $1,881.3 | $1,577.5 |
| Gross profit | $426.8 | $356.2 | $1,202.2 | $1,012.4 |
| Operating income | $115.6 | $112.8 | $280.4 | $320.6 |
| Net income | $100.8 | $103.6 | $39.2 | $284.3 |
| Diluted EPS | $2.03 | $2.09 | $0.79 | $5.74 |
| Gross margin | 65% | 64% | 64% | 64% |
| Operating margin | 18% | 20% | 15% | 20% |
Financial position, cash flow and liquidity
- Cash and working capital: Cash was $155.6 at July 31, 2018, versus $88.8 at October 31, 2017; working capital was $727.4, up from $557.1.
- Debt: Total debt was $2,294.2, versus $1,172.7 at fiscal year-end. The company had $999.5 available under its $1.0 billion revolving facility. It reported compliance with covenants: total leverage ratio 2.45x against a 3.75x maximum, and interest coverage 12.50x against a 3.00x minimum.
- Cash flows, nine months: Operating cash flow was $432.3 versus $394.6. Investing cash outflow was $1,471.0, including $1,320.8 for acquisitions and $150.2 in capital expenditures. Financing cash inflow was $1,107.7, primarily reflecting debt proceeds and repayments.
- Management said cash, cash equivalents, restricted cash and expected operating cash flow should meet anticipated needs for at least 12 months from issuance of the financial statements. It noted that additional financing, if needed, may not be available on favorable terms or at all.
Changes versus prior periods
- Q3 sales rose 19%; CooperVision sales increased 12% and CooperSurgical sales 44%. CooperVision growth included higher sales across lens categories, especially single-use spheres; silicone hydrogel products represented 69% of CooperVision sales versus 66% a year earlier.
- Nine-month sales rose 19%, but operating income fell 13%. CooperVision operating income increased to $361.1 from $308.9; CooperSurgical reported an operating loss of $37.5 versus income of $48.2, reflecting acquisition-related costs, PARAGARD inventory step-up, higher amortization and impairment.
- Nine-month net income and EPS were sharply lower, principally due to a provisional $196.7 tax-reform charge, increased acquisition-related amortization and a $24.4 impairment charge. The nine-month effective tax rate was 82.1%; the Q3 rate was a benefit of 11.5%.
- Interest expense rose to $22.8 in Q3 and $59.9 for nine months, reflecting higher average debt and interest rates. PARAGARD-related financing included a $1.425 billion five-year term loan.
Outlook, management commentary and risks
- Management expressed optimism about long-term contact lens and healthcare markets and discussed ongoing investment, product expansion and acquisition integration; the filing provides no quantified revenue or earnings guidance.
- CooperSurgical exited carrier-screening and non-invasive prenatal testing product lines after the Recombine-related impairment. Expected exit and restructuring charges were approximately $10–$15, with most activity expected to finish by fiscal year-end 2018; management said the product lines’ net losses were not material.
- Accounting for U.S. tax reform remained provisional. The company expected to finalize its estimates within the measurement period; revisions could materially affect results. The transition-tax estimate was reduced to $174.1 in Q3, within total provisional tax expense of $196.7 through Q3.
- The U.K. tax authority issued a diverted-profits-tax charge of approximately GBP 31.0 million concerning a past intellectual-property transfer. The company prepaid it (approximately $42 million), contests the charge, and said the outcome is uncertain and may adversely affect financial condition and results.
- A $3.0 million settlement of contact-lens pricing class actions was placed in escrow after preliminary court approval; final approval remained pending. Other disclosed risks include foreign exchange and variable-rate debt exposure, acquisition integration, regulation, supply disruptions, litigation, and ERP and cybersecurity risks.
Important facts for investors to verify
- How much of sales growth and segment profitability is organic versus acquisition-related and foreign-exchange driven.
- Final tax-reform accounting, including the transition-tax estimate and future tax effects, and the resolution of the U.K. tax dispute.
- Debt reduction capacity, variable-rate interest exposure, covenant headroom and liquidity after acquisition spending.
- Actual restructuring costs and progress on exiting the carrier-screening and NIPT businesses.
- Final approval and implementation of the contact-lens class-action settlement.